Adobe sees robust earnings backed by cloud subscriptions growth (Part 3 of 5)
Photoshop remains the flagship product for Adobe
In the previous part of this series, we discussed why Adobe (ADBE) expects its Q3 quarter to be a low point in terms of revenues and why it wants to completely focus on its cloud offerings from now on. Adobe is looking to expand its cloud-based product offerings so as to attract more customers to subscribe to its Digital Media suit of products. As we discussed before in this series, the Digital Media segment consists of the Creative Cloud and Document Services sub-segments, and Photoshop remains the flagship product of the Creative suite of products.
Adobe expects Digital Media annualized recurring revenue to continue to grow
During the company’s conference call to announce its Q2 2014 earnings, Adobe’s management mentioned that a separate cloud offering of Photoshop continues to attract photographers and hobbyists. This success was one of the reasons Adobe continued to grow its Digital Media annualized recurring revenue (or ARR) in the past quarters and expects this growth rate to continue. ARR doesn’t only include the individual subscriptions but also the enterprise term licensing agreements (ETLA).
As the chart above shows, the company expects its Digital Media ARR to grow from $1.4 billion in Q2 2014 to about $1.9 billion by Q4 2014 at a healthy average growth rate of 18%. If Adobe continued to grow its recurring revenues, it would benefit ETFs such as the SPDR Morgan Stanley Technology ETF (MTK), Guggenheim S&P 500 Equal Weight Technology ETF (RYT), and Technology Select Sector SPDR Fund (XLK), which have high exposure to Adobe.
Adobe’s looking to target former Photoshop Elements and Lightroom customers
Adobe competes with Apple (AAPL) and Microsoft (MSFT) in the Digital Media segment. Adobe sells the Photoshop subscription separately at a price of $9.99 per month, which includes the mobile and desktop version, while the company sells the complete Creative cloud subscription at $49.99 per month to individuals and $69.99 per month to teams. Adobe expects that by separating the Photoshop subscription, it can target photographers and hobbyists, including the former Photoshop Elements and Photoshop Lightroom customers, and entice them to purchase its Photoshop cloud subscription.
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